Last week we introduced you to Enterprise Investment Schemes (EIS) and shared how this initiative introduced by the UK government has been helping and saving small businesses. Now we take it a step further and dive into the Seed Enterprise Investment Schemes (SEIS).
What is it?
Introduced in 2012, SEIS is similar to EIS, but for much smaller companies. SEIS dramatically reduces the risk of investment. Under this scheme, you can raise up to £150,000.
How does it work?
It works in the same way as EIS, but with even better tax credits; investors that pay into SEIS companies get 50% of their investment back. So, using the same example as last week, if an investor puts £1,000 into your company, they can apply to get £500 back. This means that although their investment is worth £1,000 it has only cost them £500.
Not only this but if the company does well and the shares double in price from £1,000 to £2,000 they don’t have to pay capital gains tax if they decide to sell their shares. So, from their investment of £500 they have made a gain of £1,500 upon which they don’t pay tax. Similarly, if the value of the shares stays the same and they sell at £1,000 they have still made a gain of £500 upon which they don’t pay tax either.
Additionally, if the company doesn’t do well, and the shares devalue to £500, the investor hasn’t made a loss (as this was how much their investment cost them in the first place). If the business goes bust, the investor can apply to have their loss deducted from their gross income, so they pay less tax. Using last week’s example, say the investor earns £10,000 a month and they pay £40% tax. Their investment of £500 will be taken from their gross pay. This will mean they will only pay tax on £9,500 that month (£10,000-£500 investment loss) therefore they will be paying slightly less tax. The higher the investment, the lower the tax paid which further reduces the risk of the investment.
What do you need to qualify?
- Your company must be a new trade that has been operating for less than 2 years.
- You must have no more than £200,000 in gross assets.
- You should have less than 25 employees.
Most trades qualify for the scheme, but for a list of exceptions click here. According to the same 2014 government report, since SEIS was launched, over 1,100 companies received investment and over £80million of funds were raised. If you are an EIS or SEIS company, you will be far more attractive to investors. It is important to make the most of these schemes as the UK is very much the leader in de-risking and the success of the schemes has been huge.
Interested? For details on how to apply click here.
At Add then Multiply, we have successfully won approval from HM Revenue and Customs for several clients so that they are eligible to raise money under both EIS and SEIS, and we have helped them to raise more than £10 million using these schemes.
Next week, we go back to the raising money series and take a look at venture capital; the stakes are higher, the investment is greater but the rewards can be huge! Stay tuned.